As the camera panned the stands after the final out of the National League Division Series’ Game Two, one banner stood out: “The last time the government shut down the Braves won the World Series.” While completely true, it means nothing; the two have no correlation.
Humans have an evolutionary bias toward seeking patterns. This trait served us well when we crawled down from trees in Africa, after all a four-legged animal with yellow and black stripes sprinting toward you meant one of the band was about to be a tiger’s dinner. The ones who lived remembered. As civilizations became more advanced, we were able to learn which season to plant crops. The ones who ate well remembered.
In the investment world with all the random noise, this human trait works to our disadvantage. We always look for patterns when there are none. And we can’t help it; it’s how we are wired. Compounding the matter, the investment industry leads you to believe they can read the tea leaves.
The unfortunate truth is markets are far more random and unpredictable than humans want to admit. But we try anyway.
Jason Zweig of the Wall Street Journal theorized rats and pigeons, totally clueless about the S&P 500, would make better investors than humans. Humans seek patterns, rats and pigeons don’t. Zwieg cites a laboratory experiment with a series of randomly flashing lights, green and red. The goal is to choose which color flashes next. The one light, green for instance, flashes 80 percent of the time but in a totally random manner. Humans, even after being told there is no pattern, intuitively try and are correct 68 percent of the time. Rats and pigeons, on the other hand, see green predominately flashing so they automatically click green all the time and score 80 percent. Bottom line: Pattern seeking behavior leads to lower performance.
While the investment world is not completely chaotic, very few things are predictable. Take the stock market.
In the 4th Quarter of 2008 the U.S. Gross Domestic Product shrank almost 9 percent and investors scrambled for the hills. Since March of 2009, the S&P 500 has more than doubled while many investors let the bad numbers spook them. For the most part we kept our clients invested because market timing is a fool’s errand. The market-timing world is filled with broken heroes on a last chance power drive.
The only predictable thing in the investment world is low-cost portfolios outperform high cost portfolios. You would think it would be intuitive but often not. Diversification may be as close to a free lunch as an investor gets. Buy, hold then rebalance periodically or if your personal situation changes. Don’t obsess. If you spend more than a few hours a month looking at your investments, get a life.
A recent Marketplace Money segment shocked me. The caller wondered about the financial downside of marrying his partner of three plus decades. The financial guru rounded up the usual suspects but when the host interjected, “Are you happy?” the financial expert mockingly asked what that had to do with finances. Yeah, bozo, it has everything to do with finances. A pile of money means little if you aren’t happy. Life, liberty and the pursuit of happiness should ring a bell.
Buz Livingston, CFP, has a Blue Mountain Beach-based hourly financial planning and investment management firm. He works with clients around the country whose portfolios range from $5,000 to $7 million. For more information, visit www.livingstonfinancial.net.